This paper develops an empirical model of the drivers of portfolio flows, and concludes that South Africa has indeed received greater bond flows than can be explained by macroeconomic fundamentals. Bond flows in the four quarters through 2010:Q3 not only exceeded the average over the past 10 years, but also deviated significantly from the amount implied by explanatory variables, including the fiscal balance, the difference between the country's and world GDP growth rates and a summary indicator of external vulnerabilities. Some capital market factors specific to South Africa irrelevant to macro variables, such as size of capital market, which are reflected in remarkably high fixed effect compared to other emerging countries, have contributed to attracting equity flow.

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Santis, R., and Luhrmann,2009, “On the Determinants of External Imbalances and Net International Portfolio Flows: A Global Perspective,” Journal of International Money and Finance, Vol. 29, pp. 880–901.

Figure A1.Share of Total Equity Flows/Bond Flows into EM Countries

Figure A2.Relation of Average of Estimated Residuals on Bond Flow Share with “Pull Factors”

In this paper, we focus on 20 “peer countries” of South Africa (18 emerging countries including South Africa and 2 advanced countries) which are regarded as peer countries for South Africa in terms of GDP and their external openness. These countries are Argentina, Brazil, Chile, China, Colombia, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Peru, Poland, the Philippines, Russia, South Africa, Thailand, Turkey, and Ukraine.

They show that positive shocks to the stock market elicit an insignificant response to the net corporate bond inflow and a significant short-term positive response to the net corporate stock flow. The net corporate stock inflow does not respond to risk aversion, while bond inflows do exhibit a significant mid-term response to an increase in risk aversion.

Portes and Rey (2005) explore a new panel data set on bilateral gross cross-border equity flows between 14 countries during 1989—96 and show that gross equity transaction flows depend on market size in both source and destination country, as well as trading costs, in which information and the transaction technology play a role.

Remoteness is the GDP-weighted average distance to the G-7 and is expected to enter with a positive sign. It aims to capture a dependence of the effect of bilateral distance on the proximity of third trading partners: two countries located close to each other but “distant” from the world output are likely to transact more with each other than two equally distant states closer to world output.

Ahmed, Arezki, and Funke (2007) also indicate that a reduction in exchange rate volatility and an increase in reserves—accumulated at a pace dictated by prevailing market condition—would most likely also lead to changes in the composition of capital flows and increase the share of FDI.

In the specification for flow shares, we do not include country-invariant global factors as explanatory variables as the global factors matter for total amount of flows, not shares of total flows into sample countries. By inserting with interactions with country-specific fixed effects, we attempt to capture the impacts of global factors on the flow shares of particular country, in this case, South Africa.

Figure A2 in the Appendix shows a relationship in terms of average over the entire sample period. It is clear from Figure A2 that the average bond share of South Africa is much higher than that of EM countries and also the amount explained by macroeconomic variables.

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